Forfaiting structures

A finance structure sometimes used to reduce the cost of finance for PPPs is the forfaiting model, which can be used for 'government-pays' PPP projects. Under this model, once construction is completed satisfactorily, the government issues an irrevocable commitment to pay the project company a portion of the contract costs-typically sufficient to cover debt service. This can lower the project's financing costs. However, it means the government retains more risk under the PPP, and as debt service payments are no longer conditional on performance, the lender has less interest in ensuring project performance during operations. The forfaiting model has been widely used in Germany for small projects-typically municipal projects-where over half of the PPPs implemented between 2002 and 2006 used this structure. For more detail on the forfaiting model, see Daube's article comparing project finance to the forfaiting model [#57].

A variant of the forfaiting model is the cession de créance (assignment of receivables) used in France. Similarly, once the infrastructure is built and operational the government may commit to making a series of payments unconditional on availability that will cover some or all of the debt service of the PPP project company.

The Government of Peru has also introduced a financing structure for PPPs that is a variant on the forfaiting model, in which these irrevocable payment commitments are issued during construction on completion of defined milestones. The 'CRPAO' structure is described in Box 1.11: CRPAOs in Peru. These forfaiting-type models allow for the private partner to gradually finance its investment, by securitizing the guaranteed future flow of payments related to each phase of construction. However, it also means the Government is committed to paying a proportion of the contracted amount irrespective of whether the asset is completed. The relevance of this approach may depend on the nature of the asset-in particular, whether it is readily divisible.